* Upgrade to BB from BB- should lift foreign investment inflows
* Fitch expects Vietnam GDP growth of 6.7 pct this year
* FX reserves seen at $66 bln by year-end, from $49 bln end-2016
* Fitch says it believes non-performing loans are under-reported (Adds details and background)
By Khanh Vu
HANOI, May 15 (Reuters) - Ratings firm Fitch raised Vietnam’s sovereign credit rating on Tuesday, a move that economists said should boost the Southeast Asian economy’s already-substantial investment inflows.
Fitch raised Vietnam’s long-term foreign-currency issuer default rating to ‘BB’ from ‘BB-‘, with a stable outlook.
The agency said the upgrade reflects Vietnam’s improving policy-making aimed at strengthening macroeconomic performance.
After Fitch’s move, which comes at a time there’s pressure on many emerging market economies and worries about capital outflows, there are still two more upgrades needed before the agency considers Vietnam investment grade.
In an indication that the path to an investment grade rating might not be smooth, Fitch said Vietnam’s banking sector is structurally weak and “weighs heavily on the rating”.
Fitch said it expects Vietnam’s gross domestic product to grow by the targeted 6.7 percent this year. Growth in 2017 was 6.81 percent.
Vietnam will “remain among the fastest-growing economies in the Asia-Pacific region, and fastest among ‘BB’ rated peers,” Fitch said.
It also said Vietnam’s foreign exchange reserves are expected to reach $66 billion by the end-2018, providing a cushion against external shocks.
Foreign exchange reserves rose to $49 billion at the end of 2017 from $37 billion one year earlier, backed by large capital inflows and a current account surplus, Fitch said.
Tuesday’s upgrade “is very positive as it shows macroeconomic stability is further improving,” said Can Van Luc, an economist with the Bank for Investment and Development of Vietnam.
Luc said the upgrade will lift foreign investment inflows and that Vietnam will be able to have access to lower-cost funds.
“The country needs cheaper loans from international lenders to support its growth,” he said.
The government said last month Vietnam plans to borrow 108.03 trillion dong ($4.74 billion) from foreign sources this year.
Foreign direct investment (FDI) inflows remained strong in 2017, with the manufacturing sector seeing a 40 percent increase from the previous year to $21.3 billion, Fitch said.
Vietnam’s public debt has been well contained, Fitch said, falling to 61.4 percent of GDP at the end of last year from 63.6 percent at end-2016, supported by inflows from privatisation proceeds.
In recent years, the Vietnamese government has stepped up efforts to divest state-owned enterprises, through initial public offerings and stake sales.
The government in December raised $4.48 billion from selling a controlling 53.59-percent stake in the country’s largest brewer, Saigon Beer Alcohol Beverage Corp, to Thai Beverage PCL.
This month, the State Bank of Vietnam said non-performing loans in the banking system had been reduced to below 3 percent of outstanding loans.
But Fitch said it believed non-performing loans remain under-reported and true asset quality is likely to be weaker than stated. (Additional reporting by Subrat Patnaik in Bengaluru; Editing by James Pearson and Richard Borsuk)